A Real-Life Case Study
No Kids? You Can Still Pay $0 in Taxes
With the release of the 2017 tax brackets, the media has been inundated with articles on how big of a tax break you can expect to see if you have children. I decided to perform an analysis to see how much of an improvement families with children will see versus those without.
To start, I gathered a dataset from the Tax Policy Center containing every single tax bracket from every year since 1979. This amounted to about 2,800 individual tax returns to play with. I also gathered the same kind of data for the sample of those that did not have children. I then categorized each data point as either a family with children or without family. This gave me the following table:
- Adjusted Gross Income
- By Family Status
- Lowest Income
- Highest Income
- Without Child
- With Child
The top 400 tax payers have seen major changes in their tax situation over the last few year, but, for the most part, the shape of our tax brackets has remained exactly the same. As such, we are going to use this as our benchmark data point given that it is significantly more stable than our individual tax return data.
The Cost of Spending vs. Saving
You will be spending a lot of money every month on your six-figure income, but instead of saving up for a big vacation or investment, you will pay yourself.
Instead of spending money on cars and vacations, you will pay money into your tax deductible financial buffers, 401(k), and invest in retirement accounts.
This will allow you to spend and save at the same time. The money you earn will be constantly in motion, growing, and you will be able to access it when you need it.
If you spend the money you earn, you will lose to inflation, taxes, and fees. And you will actually have to earn more money to replace it.
If you save the money you earn, you will actually get to use it. You can spend at a later time.
Paying $0 Taxes on a Six-Figure Income
When it comes to paying taxes, the more you earn, the more you pay. However, if you have a six-figure income or more, there are some things you can do to help keep more of your money in your pocket.
There are all sorts of tax credits, deductions and other strategies you can utilize to help reduce your tax liability, but there are some big mistakes some people make along the way. Here are some common tax mistakes that a six-figure income earner could make when filing their taxes.
Not Lining up the Forms You’Ll Need
A big part of paying taxes is the actual filing of your taxes. You’ll need to request demographic information from your employer, retirement savings/plans, loan servicers, etc. to help complete your tax return. You’ll also need a W-2 form from your employer and a 1099 for any royalties or other income you’ve earned.
Not Socking Away Enough in Retirement
The biggest mistake people make when it comes to paying taxes on a six-figure income is not dedicating a large enough portion of their income to retirement or other savings options.